June 2017
« May    

Ten worst places to put your money – 2. Unit Trusts

Unit trusts are probably the most popular way for savers to invest their money. They have rightly been described as a ‘breakthrough in financial democracy’ because they allowed ordinary savers to put their money with professional financial managers at very low cost. But they have become so profitable and there are now so many of them, that there are more unit trusts than there are shares and bonds for them to invest in. A few things to watch out for. Charges – usually you’ll be told a unit trust’s ‘annual management charge’ is about 1%. In fact many costs are not included and you’ll find in reality you’re paying three times that. Entry and exit costs – when you’re told the charges are around 1% a year this glosses over the fact that you often lose about 5% of your money when you buy into a unit trust in initial charges and around 5% when you sell as the price you buy your units is much higher than the price for which you sell them. You can avoid most of the initial 5% entry charge by buying through a funds supermarket. But three quarters of money going into unit trusts goes through financial advisers – they dishonestly don’t mention fund supermarkets as they get most of your 5% in commission and would lose this if you went to a funds supermarket. Closet trackers – there are two types of unit trust: actively managed which charge about 3% and index trackers which cost 1% or less. But many supposedly actively managed funds buy pretty much the same shares, so you’re paying for active management but only getting what’s called a ‘closet tracker’. Poor performance – over the longer term around 90% of the 6,000 or so unit trusts fail to beat the overall stock market. So how are you going to find the 10% which do actually perform? Making insiders rich – we pay around £59 million a day to unit trust firms to manage our money whether our investments go up, stagnate or collapse in value. The result is that fund managers become multimillionaires and we are lucky to get a few crumbs.

Comments are closed.